Do I Need an Emergency Fund? How Much Money Should I Put In? We Answer All Your Questions

Last Updated on August 15, 2021

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Why have an emergency fund? The reality is with little warning you could become responsible for a hospital bill for thousands of dollars, an unexpected roof repair or AC issue. Surprise costs arrive all the time in real life. And many of us believe we should be prepared with a rainy day fund.

In theory, the concept of an emergency fund sounds fabulous. But there are so many pressing financial obligations that come up every month. Paying the mortgage, rent, car lease, groceries, and tuition, among other things, feels like a priority because those costs can’t be delayed. The bills must be paid.  You may be paying off your student debt, credit cards and other debt, too. So how does anyone have enough to create an emergency fund?

Should You Call it a Freedom Fund?

Tana Gildea, a principal at Homrich Bergh Wealth Management, suggests a name change that may make the business of setting up and paying into an emergency fund somewhat more palatable. Call it your freedom fund!

The fund will free you from a  range of anxieties, as well as more tangible troubles as late fees, overdraft fees, etc. — the tyrannical costs of facing emergencies without a freedom fund. 

Making payments to your freedom fund seems like a worthy endeavor. 

A lot of advisors will tell you that as a rule of thumb the optimal size of a freedom fund is between three and six months worth of your living expenses. That includes at minimum housing, food, routine health care expenses, including insurance premiums, transportation and utilities.

But the problem with the 3-to-6-months rule is that it can yield a number that looks intimidating. It can cause you to give up on the project before it has even begun. 

Here Gildea again has some insightful advice. She writes, “set a goal to build up $100 and do it.” That will already give you a sense of accomplishment. “Then set a goal to save another $100….Pick a goal that feels achievable in a relatively short period of time” and accomplish it. Then take the achievement of that goal as a stimulus to reset the bar. 

Where should you keep the freedom fund? One straightforward answer is: keep it in a savings account at the same bank where you have a checking account. This will allow for easy transfers of the funds from one to the other if the emergency does arise. 

Can You Use Your Emergency Fund to Invest?

Another obvious question arises. Should you invest your freedom fund? In a safe investment, but still in something that offers a better yield than a bank’s savings account? 

You want your freedom fund in a place that will be safe, of course, as well as liquid [that means, the money remains easy to access without penalties when the time comes], and in addition if at all possible you want some yield. 

Money market funds hold portfolios that consist chiefly of Treasury bills, commercial paper, bankers’ acceptances, repurchase agreements, and CDs. All quite boring: just the way you want the management of your freedom fund to me.

That, of course, is merely a suggestion, and your own research may generate others. One final word about money market funds, though they have a reputation for safety, they are not FDIC insured. If you want that extra increment of safety that comes from federal insurance, you’ll have to stick with what the regulated banking system offers.

Whatever approach you take: Good luck!